2 minute read
HMBS spreads continued to tighten into late March with fixed-rate HMBS trading 44 to swaps (roughly 111 dollar price) for corporate settle, and Libor HMBS trading at 56 discount margin (roughly 108 dollar price).
Spreads are 50 basis points in spread from year-end, meaning that dollar prices are 3 to 4 points higher. Sponsorship of IOs has improved over the past four to six weeks, with new entrants coming in for bonds after a several-month hiatus. Yields for fixed and floating IOs are in several hundred basis points in 2014. Expect further tightening into summertime.
Given the lack of HECM origination, tightening has been led by dealers, however, the tightening has followed other agency MBS sectors into 2014 tights. Prepays continue to come in slow and stable, with seasoned fixed-rate speeds slowing down to 1 to 2 conditional prepayment rate, which translates to roughly 20 percent of the HECM prepayment curve. Libor prepays, although quicker, still slow down to between 40 and 50 percent of the HECM prepayment curve with seasoning.
The product mix has recently shifted over to fixed line of credit and pay option loans, which present more interest rate exposure to Ginnie Mae issuers. We were seeing 70 to 80
percent floating rate with the balance mostly fully drawn fixed rate. With these new loans, issuers essentially have exposure to interest rates moving higher in subsequent years as they will need to fund borrower disbursements and securitize those pieces into new Ginnie Mae pools. In order to mitigate this risk, Ginnie Mae issuers will need to utilize hedging instruments that will effectively insulate against these tails reaching securitization below par (which are the prices where disbursements are made). We shall see how this plays out.
